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Bankruptcy and Insolvency Archives

Equitable Subordination - Will it find a home in Canada?

When a debtor is insolvent, recovery by a creditor will generally depend on the creditor's ranking. Secured creditors will have priority over preferred creditors who in turn have priority over unsecured creditors. If a claim can be characterized as an equity claim, it could be further subordinated. Notwithstanding these general rules, the Supreme Court of Canada could soon give courts wider discretion to adjust priorities even further in certain situations.

Pursuing claims in bankruptcy

In a bankruptcy, the bankruptcy trustee is in charge of collecting on any claims held by the bankrupt, and is also given additional powers under the Bankruptcy and Insolvency Act (BIA) to attack transactions entered into prior to bankruptcy. But what happens when the trustee fails or refuses to pursue a claim?

Director liability during bankruptcy

When a company faces insolvency or bankruptcy, the directors (and sometimes officers) of the company can face personal liability for the company's debts. Although a properly incorporated company is a separate legal person and as a general rule its creditors have no personal claim against the company's directors, there are many exceptions to this rule.

Acquiring a distressed business

While a failing business may be burdensome to its current owners, acquiring the entity or its assets can be very attractive to onlookers. Such a purchase takes a competitor out of the market, enables substantial instant growth and ensures a negotiated cost that may be much lower than “organic” growth. Offsetting these attractions are the risks of distressed-business acquisition, including lack of recourse, which should be addressed through due diligence, valuation and negotiation.

Priority of creditors in bankruptcy

Under section 70 of the Bankruptcy and Insolvency Act (BIA), when a debtor assigns into bankruptcy, or is adjudge a bankrupt by a court, and subject to the rights of secured creditors and other provisions of the BIA, all of the debtor's non-exempt assets pass to and become vested in a Licensed Insolvency Trustee. The trustee will realize on the assets and, together with any other proceeds generated in the course of the bankruptcy, distribute the proceeds to creditors. However, not all creditors are treated equally.

Approval thresholds for BIA and CCAA proposals to creditors

Under the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA), companies in financial straits may seek a stay of proceedings in order to given the company time to devise a proposal to creditors under the BIA (Proposal) or a plan or arrangement and compromise to creditors under the CCAA (Plan) rather than declare bankruptcy. The Proposal or Plan will address compromises on amounts owing and the timing of repayment. If the Proposal or Plan is approved by the creditors and the court, the arrangement allows a company to manage debt while continuing to operate its business.

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